Trade Deficit Probably Narrowed in June<br/>/////////////////////////<br/>The trade deficit in the U.S. probably shrank in June as cheaper oil reduced the import bill and slower global growth led to reduced demand for American-made goods, economists said before a report this week. 
<br /> The gap narrowed to $47.5 billion, the smallest in four months, from $48.7 billion in May, according to the median forecast of 59 economists surveyed by Bloomberg News before the Commerce Department issues the data on Aug. 9. Another report may show worker productivity rose and labor costs eased in the second quarter. 
<br /> Slowing economies in Europe and Asia means customers overseas may cut orders to American manufacturers, depriving the expansion of one of its mainstays. In the U.S., unemployment that’s exceeded 8 percent for 42 straight months may prompt consumers to slow purchases of goods made abroad. 
<br /> “Trade had definitely made an outsized contribution thus far in the economic cycle, but that phase is rapidly drawing to a close,” said Carl Riccadonna, a senior U.S. economist at Deutsche Bank Securities Inc. in New York. “Global trade has been slowing. Imports are not booming by any stretch.” 
<br /> The strain on exports comes as countries in Europe teeter near recession and the Chinese expansion cools. The U.K.’s economy shrank 0.7 percent in the second quarter, the most since 2009, a government report showed July 25. 
<br /> China’s growth slowed to the weakest pace since 2008, expanding 7.6 percent last quarter from a year earlier, the National Bureau of Statistics said July 13. 
<br /> Share Prices 
<br /> Slower global economies help explain why shares of equipment makers have lagged behind the broader market. The Standard &amp; Poor’s Supercomposite Machinery Index (S15MACH), which includes companies like Eaton Corp. (ETN) and Deere &amp; Co., has gained 3.5 percent this year while the S&amp;P 500 (SPX) index has risen 11 percent. 
<br /> “Our guidance for the full year really constitutes a recalibration of global growth prospects,” Eaton Chief Executive Officer Sandy Cutler said during a July 23 earnings call. “Global growth has clearly slowed, and the European and Chinese recovery, we think, has pushed out of 2012.” 
<br /> The Cleveland-based company projects its markets, including electrical, hydraulics, auto and aerospace parts, will expand 8 percent in the U.S. this year while dropping 1 percent in the rest of the world, Cutler said. 
<br /> On the other end of the trade ledger, retreating oil prices probably restrained the value of imports in June. The cost of imported petroleum decreased 11 percent from the prior month, the biggest decline since December 2008, the Labor Department said July 12. 
<br /> Oil Prices 
<br /> Oil prices started to rebound in July and a sustained pickup may hurt consumers’ buying power. Brent crude on the ICE Futures Europe exchange in London rose as high as $109.13 a barrel on Aug. 3, up from a low this year of $88.49 on June 21. 
<br /> The cost of all imported goods rose 0.1 percent in July after falling 2.7 percent the prior month, economists surveyed projected a Labor Department report on Aug. 10 will show. 
<br /> Imports may be limited as the U.S. labor market struggles. The jobless rate unexpectedly rose to 8.3 percent in July from 8.2 a month earlier, Labor Department figures showed Aug. 3. A 163,000 gain in payrolls followed a 64,000 increase in June. 
<br /> Federal Reserve officials “will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market,” according to an Aug. 1 statement from the Federal Open Market Committee. The policy makers left unchanged their statement that economic conditions would likely warrant holding the benchmark interest rate target near zero at least through late 2014. 
<br /> On Aug. 8, Labor Department figures may show the productivity of American workers grew at a 1.4 percent annual pace from April to June after dropping 0.9 percent in the first quarter, according to the median estimate in a Bloomberg survey. The report may also show expenses per employee rose at a 0.5 percent rate after a 1.3 percent first-quarter increase. 
<br /> Source: Bloomberg
<br /> 
<br /><br/>------------------------------------------------------------------------------------------------------------------------------------------------------------<br/>ECB saves Greece from bankruptcy by securing emergency loans-paper<br/>/////////////////////////<br/>The European Central Bank (ECB) has saved Greece from bankruptcy for the time being by securing it interim financing in the form of additional emergency loans from the Bank of Greece, German newspaper Die Welt said on Saturday.
<br /> The ECB's Governing Council agreed at its meeting on Thursday to increase the upper limit for the amount of Greek short-term loans the Bank of Greece can accept in exchange for emergency loans, the newspaper said in an advance copy of the article due to appear in its Saturday edition.
<br /> Until now the Bank of Greece could only accept T-Bills up to a limit of 3 billion euros ($3.70 billion) as collateral for emergency liquidity assistance (ELA) but it has applied to have this limit increased to 7 billion euros, the daily said, citing central bank sources.
<br /> The ECB Governing Council gave this wish the green light, the paper said.
<br /> The move should enable the Greek government to access up to an extra 4 billion euros of funds, the paper said, adding that this should ensure the country keeps its head above water until the &quot;troika&quot; of the European Union, the European Central Bank and the International Monetary Fund decide on the disbursement of the next tranche of money from its aid program in September.
<br /> The ECB declined to comment, the paper said.
<br /> Source: Reuters<br/>------------------------------------------------------------------------------------------------------------------------------------------------------------<br/>Analysis: Fed In Wait-And-See Mode But With Heavy Easing Bias<br/>/////////////////////////<br/>Caution ruled the day Wednesday, as Federal Reserve Chairman Ben Bernanke and his colleagues decided, after two days of meetings, to risk disappointing financial markets and keep monetary policy on hold -- for now. 
<br /> However, additional stimulus measures are very much on the table, as the Fed's policymaking Federal Open Market Committee made abundantly clear in a statement. There is a heavy easing bias.
<br /> After observing that economic activity has &quot;decelerated,&quot; that consumer spending and hiring have slowed and that unemployment&quot; is &quot;elevated,&quot; the Fed indicated that if things do not improve, it &quot;will provide&quot; more monetary stimulus &quot;as needed&quot; to promote stronger growth and lower unemployment. 
<br /> At the FOMC's next meeting, Sept. 12-13, policymakers will be revising their economic projections -- already marked down in June. If, by then, the economy is performing even worse than expected, forcing further downward revisions, the Committee is highly likely to take another stab at aiding the ailing economy. 
<br /> For some officials, a simple lack of improvement will suffice to justify some kind of action.
<br /> And it could be strong action.
<br /> A third round of large-scale government bond buying -- &quot;quantitative easing&quot; -- to further reduce already very low long-term interest rates will be a definite possibility. At the very least, the FOMC seems likely to communicate a further delay of short-term rate hikes through its &quot;forward guidance&quot; language. Or the two measures could be adopted in tandem. 
<br /> Bernanke, in his July 17 Monetary Policy Report to Congress, also mentioned two other options: discount window lending and reducing (if not eliminating) the interest rate it pays on excess reserves (IOER). These seem less likely. 
<br /> There will be those on the FOMC who will argue that additional monetary stimulus would be futile and that only a resolution of non-monetary impediments to growth will speed recovery. But the predominant view is that the Fed's statutory dual mandate obligates the Fed to do its utmost to achieve maximum employment and price stability, the latter including a lack of excessive disinflationary pressures. 
<br /> The FOMC will have to weigh the costs and benefits, but as and when the economy deteriorates the perceived benefits rise and the costs go down. 
<br /> There was little to cheer the spirit in the Fed's latest policy statement, which sounded bleaker than the one issued June 20.
<br /> &quot;Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year,&quot; it said. &quot;Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance.&quot; 
<br /> &quot;Household spending has been rising at a somewhat slower pace than earlier in the year,&quot; it continued. &quot;Despite some further signs of improvement, the housing sector remains depressed.&quot; 
<br /> Meanwhile, the Fed said, &quot;inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.&quot; It went on to anticipate that &quot;inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate,&quot; i.e. 2%. 
<br /> And so the FOMC voted 11 to 1 (with Richmond Federal Reserve Bank President Jeffrey Lacker dissenting once more) to continue the &quot;Operation Twist&quot; maturity extension program through yearend, to continue reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and to maintain its quasi-committment to keeping the federal funds rate near zero &quot;at least through late 2014.&quot; 
<br /> That's where it stopped for now. But stand by.
<br /> The FOMC left the door wide open to doing more on Sept. 13, when members will not only compile a new Summary of Economic Projections and funds rate forecasts but Bernanke will hold a quarterly news conference. 
<br /> &quot;The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,&quot; the statement said. 
<br /> That differs from the June 20 declaration that &quot;the Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.&quot; But there is little practical difference, and arguably the language is a tad stronger.
<br /> Why precisely the FOMC deferred action at least until Sept. 13 will only become clear with the release of the minutes in three weeks.
<br /> But one reason that should probably be ruled out is a desire to avoid the appearance of affecting the November election outcome. 
<br /> More likely, there was still an element of uncertainty among FOMC members about how persistent the second-quarter slowdown will be and about how much more the Fed can effectively do to speed growth.
<br /> There was also probably a reluctance to act again so soon after the extension of Operation Twist. Doing more at this juncture might have been seen as verging on panic.
<br /> The FOMC may also not want to have taken the policy lead ahead of an anxiously awaited European Central Bank meeting Thursday.
<br /> Clearly, the FOMC decided to wait for more information, including not just U.S. economic data but developments in Europe.
<br /> The Labor Department will be releasing the July employment report Friday, and it is likely that the Fed had an educated idea of what it will show. If the ADP employment report was any indication, perhaps it will show a significant rebound from the dismal numbers of the past several months. 
<br /> That can only be taken so far, of course. The findings of the Institute for Supply Management's July manufacturing survey, released Wednesday morning, were less encouraging. Although the overall index inched up to 49.8, that is still in contractionary territory, and the employment component showed a sharply reduced pace of factory hiring. 
<br /> The FOMC is focused overwhelmingly on employment, and if the numbers do not measurably improve, the odds of Fed action will greatly increase by the time Sept. 12 rolls around. 
<br /> Source: MNI
<br /><br/>------------------------------------------------------------------------------------------------------------------------------------------------------------<br/>GCC to post solid economic growth in 2 years<br/>/////////////////////////<br/>The GCC region is expected to register solid economic growth in the next two years supported by high oil prices, strong government financial balances and a continued wave of public spending on infrastructure projects and social items, said a report.
<br /> However, global risks loom large over the region's economic growth. The risks to the overall growth outlook have nonetheless become more apparent, said the National Bank of Kuwait in its latest brief on GCC outlook.
<br /> A long recession or break-up of the euro zone could generate a sharp fall in oil prices, which would weaken Gulf governments’ fiscal positions, undermine confidence and potentially create challenges in financing infrastructure projects, it stated.
<br /> 'The real GDP growth is seen dipping from 5.1 per cent in 2012 to 3.5 per cent in 2013, though the decline is largely due to a policy-driven cut in oil output from Gulf Opec members,' said the report.
<br /> According to NBK, the Gulf region's non-oil growth – a better measure of underlying economic performance – will stay close to 5 per cent, slightly above the average of the previous 3 years.
<br /> Oman may be the region’s fastest growing economy in 2013, knocking Qatar off the top spot it has held for 8 years, it added.
<br /> Despite a sharp drop in oil prices in the second quarter, NBK said it expects regional crude oil production to stay close to its recent high of 17.2 million barrels per day (mbpd) this year, as Saudi and other Gulf exporters seek to boost stock levels to guard against non-GCC supply disruptions.
<br /> Oil prices are assumed to average $110 per barrel (pb) this year and fall to $100 pb in 2013, driven by higher stock levels and a weak global economy. In response, Gulf oil production is expected to ease back next year, it added.
<br /> The Kuwaiti bank pointed out that the prospect of a major – and sudden – fiscal contraction in the US in 2013 represents a huge risk to the global economy even if the euro zone muddles through.
<br /> Under these conditions, the Gulf non-oil growth is likely to slow, though it would avoid recession, said the NBK in its brief.
<br /> In spite of healthy activity levels and a pick-up in money and credit growth, inflation has generally remained low and even decelerated in some countries. On a weighted average basis, it stood at 3 per cent in May, it stated.
<br /> The fall in global food prices in the second half and soft housing markets in the UAE and Qatar have helped, but core inflation also remains subdued, said the NBK brief.
<br /> Stable food prices, low inflation rates abroad, the impact of the strengthening US dollar on import prices and a continued emphasis on cost control amongst regional businesses will help keep price pressures muted, it stated.
<br /> According to NBK, the average inflation will be close to three per cent this year and the next.
<br /> The spending by the regional governments, said the report, surged by 22 per cent last year. Yet the combined GCC budget surplus actually rose to 11 per cent of GDP thanks to a 49 per cent jump in oil revenues.
<br /> While the aggregate fiscal position is sound, rising spending commitments have increased vulnerabilities to lower oil prices, said the NBK in its brief. 
<br /> Budget breakeven oil prices now range from $72-115 pb, compared to around $30 pb in 2005. A sustained period of lower oil prices would increase the need for fundamental fiscal reform, it added.
<br /> Source: TradeArabia News Service<br/>------------------------------------------------------------------------------------------------------------------------------------------------------------<br/>World’s wealthiest gain $19.4 billion as stocks surge on jobs<br/>/////////////////////////<br/>The 40 richest people on the planet added $19.4 billion (Dh71.23 billion) to their collective net worth on Saturday after an increase in US jobs and positive earnings reports erased losses sustained earlier in the week.
<br /> The day’s biggest gainer was Spanish retail tycoon Amancio Ortega, who added $2.8 billion to his fortune as shares of Inditex SA, the world’s largest clothing retailer, jumped 5.4 per cent. The 76-year-old, Europe’s richest man, is worth $45.1 billion, according to the Bloomberg Billionaires Index.
<br /> “Investor sentiment has turned a little bit more positive,” said Kristen Scarpa, a New York-based investment strategist at Barclays Wealth Management, in a telephone interview yesterday. “Job growth is the key to igniting additional consumption, which will drive the US economy forward.”
<br /> Global stocks slumped earlier in the week after European Central Bank President Mario Draghi failed to articulate the details of a bond-buying plan to ease the euro area crisis.
<br /> Delisting LLX
<br /> In the full week, Eike Batista, Brazil’s richest man, gained $65 million after he offered on July 31 to buy back all of the outstanding shares of his ports developer, LLX Logistica SA. Batista will pay as much as 618.7 million reais (Dh1.2 billion) to take the Rio de Janeiro-based LLX private. The company’s stock plunged to a three-year low last month.
<br /> The proposal is a reversal for Batista, 55, who has taken public six energy, commodities and logistics startups since 2006. Batista’s $21.3 billion fortune makes him the world’s 22nd-richest person.
<br /> Bernard Arnault’s fortune increased $474 million during the week. Shares of LVMH Moet Hennessy Louis Vuitton SA, the world’s largest luxury goods maker, rose 3.1 per cent in Paris trading after reporting a 20 per cent increase in first-half earnings on July 26. France’s richest man, 63, ranks 16th on the index with a net worth of $24.1 billion.
<br /> Carlos Slim, 72, remains the world’s richest person. Slim’s fortune lost $569 million. He now has a net worth of $74.9 billion.
<br /> Seychelles Island
<br /> Bill Gates, 56, is $12.2 billion behind Slim. Shares of Microsoft, the world’s biggest software maker, were unchanged for the week. The world’s biggest software maker announced on July 31 that it will phase out Hotmail and introduce a new, free Web-based e-mail portal as it seeks to draw users from Mountain View, California-based Google Inc’s Gmail.
<br /> No 3 on the index is Warren Buffett, 81, with a net worth of $45.9 billion. Shares of Berkshire Hathaway Inc rose to a 16-month high during the week. The Omaha, Nebraska-based company said yesterday that profit slipped 9 per cent in the second quarter as derivative bets declined in value.
<br /> Liliane Bettencourt, Europe’s richest woman, sold her private island in the Seychelles to marine conservation organisation Save Our Seas Foundation for $60 million, it was announced on July 31. The L’Oreal SA heiress, 89, ranks 15th on the index with a net worth of $24.2 billion.
<br /> The richest man in Asia is Li Ka-shing, who ranks 14th on the index with a net worth of $24.5 billion. Shares of the billionaire’s Cheung Kong Holdings Ltd rose 3.38 per cent during the week in Hong Kong.
<br /> Family Trust
<br /> Hutchison Whampoa Ltd, Li Ka-shing’s biggest company, posted first-half profit that beat analysts’ estimates after boosting earnings from UK utilities, phone services in Europe and retail stores in China.
<br /> The 84-year-old last month transferred his son Richard’s stake in the family trust that controls Hutchison Whampoa and flagship developer Cheung Kong to his oldest son, Victor.
<br /> “His character is similar with mine and he is prudent when dealing with things,” the elder Li said at a press conference in Hong Kong on August 1. “I shall do my best to support him. I have the cash in the bank and he can take it anytime. It’s for him but I’m not encouraging him to take it all now.”
<br /> The Bloomberg Billionaires Index takes measure of the world’s wealthiest people based on market and economic changes and Bloomberg News reporting. Each net worth figure is updated every business day at 5.30pm in New York and listed in US dollars.
<br /> Source: Bloomberg<br/>------------------------------------------------------------------------------------------------------------------------------------------------------------<br/>Greece to Complete Budget Plan by Early September, Official Says<br/>/////////////////////////<br/>The package of budget cuts Greece has to make to qualify for international rescue funds and keep it in the euro area will be completed by early September, a Greek finance ministry official said yesterday. 
<br /> Talks between representatives of Greece’s international creditors, the so-called troika, and the government agreed on a “good proportion” of measures, said the official, who declined to be identified because the talks are ongoing. 
<br /> Work will continue on the package this week, the official said. 
<br /> Source: Bloomberg<br/>------------------------------------------------------------------------------------------------------------------------------------------------------------<br/>Employers step-up hiring, but Fed still in picture<br/>/////////////////////////<br/>Employers in July hired the most workers in five months, but an increase in the jobless rate to 8.3 percent keep prospects of further monetary stimulus from the Federal Reserve on the table.
<br /> Nonfarm payrolls rose 163,000 last month, the Labor Department said on Friday, breaking three straight months of job gains below 100,000 and offering hope for the ailing economy.
<br /> &quot;As long as the unemployment rate is high, the central bank will have to consider further stimulus,&quot; said Sung Won Sohn, an economics professor at California State University Channel Islands in Camarillo, California.
<br /> While the report gave talking points to Republicans and Democrats for the upcoming general election, investors on Wall Street shrugged off the rise in the jobless rate and snapped up stocks.
<br /> The unemployment rate rose from 8.2 percent in June, even as more people gave up the search for work and a survey of households showed a drop in employment.
<br /> The Federal Reserve on Wednesday sent a stronger signal that a new round of major support could be on the way if the recovery did not pick up. The labor market has slowed after hefty gains in the winter, spelling trouble for President Barack Obama.
<br /> A recent Reuters/Ipsos poll showed 36 percent of registered voters believe Republican presidential candidate Mitt Romney has a better plan for the economy, compared to 31 percent who had faith in Obama's policies.
<br /> Both Obama and Romney used the jobs report to plead their case to America's middle-class. Obama said the Republican tax plan would hurt the middle-class.
<br /> &quot;The last thing that we should be doing is asking middle class families who are still struggling to recover from this recession to pay more in taxes,&quot; Obama said at the White House.
<br /> Romney said the rise in the jobless rate was &quot;a hammer blow to struggling middle-class families.&quot;
<br /> The step-up in hiring beat economists' expectations for a 100,000 gain. It suggested the slump in job growth in the second quarter was largely payback for an unusually warm winter that had brought forward hiring into the early months of the year.
<br /> &quot;When we look at the July numbers it looks like the payback is largely behind us. It's likely that August and September will look more like July than the second quarter,&quot; said Ray Stone, an economist at Stone &amp; McCarthy Research Associates in Princeton, New Jersey.
<br /> So far this year, job growth has averaged 151,000 per month, almost the same as the monthly average last year. This is roughly the amount needed just to keep the unemployment rate steady.
<br /> ODDS FAVOR MORE EASING
<br /> While the payrolls growth probably dampened the urgency for the Fed to act at the September 12-13 meeting, further monetary stimulus remains in the cards given the threat to the economy from a potential tightening in fiscal policy next year and the ongoing debt troubles in Europe.
<br /> The household survey offered a downbeat assessment of the labor market, with the employment-to-population ratio - the broadest measure of labor utilization - falling 0.2 percentage point to 58.4 percent.
<br /> &quot;We think the odds are still tilted in favor of more Fed accommodation at the September meeting, and that call obviously remains contingent on economic and financial developments over the next six weeks,&quot; said Michael Feroli, an economist at JPMorgan in New York.
<br /> The labor force participation rate, or the percentage of Americans who either have a job or are looking for one, fell to 63.7 percent last month from 63.8 percent.
<br /> Data last week showed the economy grew at an annual pace of 1.5 percent in the second quarter, far short of the 2.5 percent rate needed to keep the unemployment rate stable.
<br /> STOCKS RALLY
<br /> U.S. stocks rallied on the report, putting the Standard &amp; Poors' 500 index on track to recover all of the losses posted during its recent four-day losing streak.
<br /> Prices for U.S. government debt fell and the dollar dropped more than 1 percent against a basket of currencies.
<br /> The private sector again accounted for all the job gains, adding 172,000 new positions. Government payrolls dropped by 9,000, as cash-strapped local governments laid off teachers.
<br /> Construction employment dipped 1,000, despite a rise in home building. Manufacturing payrolls increased 25,000, largely because of fewer layoffs in the auto sector as manufacturers kept production lines running during the month.
<br /> Within the vast services sector, employment gains were fairly widespread. From retail to professional and business services, employers added workers.
<br /> However, the momentum could slow. A second report showed the services sector grew modestly in July as new orders rose, but a measure of employment dropped to its lowest level in nearly a year.
<br /> Last month, temporary help services increased 14,100 after rising 21,100 in June. But hiring in the utility sector was restrained by a strike at a power firm in New York last month.
<br /> Average hourly earnings increased 2 cents last month, suggesting consumer spending will struggle regain steam after it slowed sharply in the second quarter. In the 12 months to July, earnings rose 1.7 percent.
<br /> The average workweek was unchanged at 34.5 hours.
<br /> Source: Reuters
<br /><br/>------------------------------------------------------------------------------------------------------------------------------------------------------------<br/>S&P Downgrades 15 Italian Banks<br/>/////////////////////////<br/>Standard &amp; Poor's Ratings Services raised its economic-risk score on Italy and downgraded 15 Italian banks Friday, noting the country faces a deeper and more prolonged recession than the firm had originally anticipated. 
<br /> S&amp;P also lowered its outlook on one bank. 
<br /> A severe recession likely will increase Italian banks' problem assets in 2012 and 2013 to levels higher than anticipated, and higher than other banks in Europe, the ratings firm said. 
<br /> At the same time, the banks' coverage of problem assets has weakened in the past few years, S&amp;P said. 
<br /> S&amp;P revised its economic-risk score, which is a component of the firm's banking-industry country-risk assessment, or Bicra, on Italy to 5 from 4. The firm now views credit risk in the Italian economy at &quot;high risk&quot; from its earlier assessment of &quot;intermediate risk.&quot; It affirmed Italy's Bicra at group 4. 
<br /> The ratings firm now expects Italy's gross domestic product to decline 2.1% in 2012 and 0.4% next year. S&amp;P noted the state of the Italian economy, which hasn't recovered since its 2008-09 recession, is increasing the vulnerability of its banks' asset quality. 
<br /> S&amp;P projects Italian banks' problem assets, or the sum of bad loans and watchlist loans, will rise to EUR218 billion by the end of 2013, compared with EUR166 billion at the end of 2011. Italian banks' problem assets at year-end 2011 had already more than doubled from EUR75 billion in 2008, owing to the recession, the firm added. The firm also said Italian banks' coverage of problem assets through provisioning has decreased further over the past few years. 
<br /> Unione di Banche Italiane SCpA was downgraded a notch to triple-B, two rungs higher than junk grade. 
<br /> Banca Popolare dell'Alto Adige, Iccrea Holding SpA, Iccrea Banca SpA, Iccrea BancaImpresa SpA, Agos-Ducato SpA and Banca Monte dei Paschi di Siena SpA were downgraded to triple-B-minus, one rung higher than junk grade. 
<br /> The ratings of Banca Carige SpA, Banca di Credito Cooperativo di Conversano S.c.r.l, Banca Popolare dell'Emilia Romagna S.C.A.R.L., Banca Popolare di Vicenza (BVZ.YY), Eurofidi Scpa, Banca Popolare di Milano S.C.A.R.L. and Banca Akros SpA were cut to double-B-plus, one notch into junk rating. 
<br /> Dexia Crediop SpA was cut to B-plus, four notches into speculative grade. 
<br /> S&amp;P lowered its outlook on FGA Capital SpA to negative from stable. The ratings firm withdrew Cassa di Risparmio della Provincia di Teramo SpA from negative credit watch, leaving its rating at B. 
<br /> Last month, S&amp;P peer Fitch Ratings affirmed Italy's long-term ratings at A-minus, pointing to the country's structural reforms to enhance the growth potential of the economy and commitment to reducing the budget deficit and public debt. 
<br /> Also in July, Moody's Investors Service downgraded Italy's government-bond rating two notches to Baa2, saying the country faces a greater likelihood of a further sharp increase in funding costs or loss of market access given euro-area risks and that its economy has continued to deteriorate. Moody's also lowered its long-term ratings on 10 Italian banks and its issuer ratings on three Italian financial institutions by one to two notches last month. 
<br /> In January, S&amp;P cut Italy's rating by two notches to triple-B-plus. 
<br /> Source: Dow Jones<br/>------------------------------------------------------------------------------------------------------------------------------------------------------------<br/>Crisis stifles Italian firms' competitiveness drive<br/>/////////////////////////<br/>Italy's &quot;war&quot; with international debt markets has sent borrowing costs soaring for its traditionally prudently managed private companies, stifling their efforts to invest in competing more strongly with rivals in Germany and beyond.
<br /> Just as Prime Minister Mario Monti tries to fix the problems that have hindered Italy's private sector for decades, notably its legendary official red tape, companies are paying significantly more to borrow than competitors to the north.
<br /> The European Central Bank has slashed its interest rates and showered banks with cheap cash in the hope they will lend to companies and consumers in the struggling southern nations such as Italy, which have been worst hit by the euro zone crisis.
<br /> But at the same time, a jump in Italy's borrowing costs on the sovereign bond market has dragged up interest rates on bank loans to Italian industry.
<br /> &quot;We used to be able to borrow at 2.5-3 percent. But since this war of the sovereign bond spreads began, things have changed dramatically,&quot; said Paolo Bastianello, Chairman of textiles group Marly's. &quot;The cost of credit has certainly risen by a couple of percentage points.&quot;
<br /> Marly's is the kind of Italian manufacturer that typically competes strongly on international markets, making high-end women's clothes under its own label and for top fashion brands such as Carlo Pignatelli and Kathleen Madden.
<br /> A company with annual sales of 16.5 million euros, Marly's is based near the historic city of Vicenza in the Veneto, a region thick with small and medium-sized companies (SMEs) which have long exported goods and components to the huge German market across the Alps.
<br /> Even though the ECB's benchmark rate has fallen to a record low 0.75 percent, the cost of corporate credit in Italy now reflects more the general risk associated with the state and the cost of sustaining its mammoth 2 trillion debt.
<br /> Italy's conservative companies, which have avoided taking on the huge debt burdens typical in the Anglo-Saxon world and fellow euro zone struggler Spain, are paying the price for a state debt equal to 120 percent of annual economic output.
<br /> At 81 percent of gross domestic product, total net indebtedness of Italian non-financial companies is significantly lower than in Britain, France and Spain, although slightly higher than in Germany, according to Bank of Italy data.
<br /> But Italian firms rely on banks for 70 percent of their financial debt, a higher share than the European average. This makes them dependent on banks' lending policies and vulnerable to domestic economic developments.
<br /> ECB data released on Wednesday showed that companies in Italy paid on average a 4.57 percent interest rate in June for short-term loans of up to one million euros. This compares with just 3.37 percent paid by their German competitors and is half a percentage point higher than the euro zone average.
<br /> Yet 18 months ago, before being engulfed in the euro zone crisis, Italian companies could get small short-term loans at 3.22 percent, below the euro average and Germany, ECB data show.
<br /> FALLING FOUL
<br /> Companies from the largest corporations to the smallest family businesses have now fallen foul of the rule that private borrowers must be a greater credit risk than the governments of the country where they are based.
<br /> Italian firms, like many around Europe, have long found it hard to match their German competitors' high productivity. But if they borrow now to fund productivity improvements, their disadvantage simply grows.
<br /> &quot;To the extent that Italian SMEs are competing with Germany, they are having to confront a landscape that is not a level playing field any more. It's significantly skewed against them,&quot; said Sony Kapoor, who heads the economic think-thank Re-Define.
<br /> &quot;But put yourself in the shoes of the banks: if you see that the Italian government is paying 6 percent on its bonds, how can you then lend to someone more risky, an SME, at a lower rate?&quot;
<br /> For loans with a maturity of five years or more, the cost for companies in Italy and Spain is now based on what their respective governments are paying to sell equivalent debt.
<br /> The interest rate on such corporate loans is averaging 6 percent in Italy and 6.5 percent in Spain - where the government is struggling to avoid joining Greece, Ireland, Portugal and Cyprus in taking a full state bailout - against a mere 3.5 percent in Germany, according to Goldman Sachs.
<br /> &quot;The influence of official ECB rates on retail interest rates in Italy and Spain has diminished while it has increased in Germany and France,&quot; said Goldman Sachs' Natacha Valla.
<br /> &quot;While Italian and Spanish households and non-financial corporations are facing sharp increases in the rates they are charged by their banks, their German counterparts have been borrowing at rates declining in line with official rates.&quot;
<br /> Changes in official ECB rates traditionally feed through to the cost of bank loans via the corporate bond market, a preserve of the biggest private sector borrowers, but this is no longer true in the weaker euro zone members.
<br /> The competitive difference is felt also by the corporate giants. Italian utility Enel, which has the same credit rating as its German counterpart RWE, pays nearly 336 basis points over swap interest rates for its 2018 bond - giving a current yield of about 4.55 percent.
<br /> By contrast, RWE's 2018 bond trades at just 36 basis points over swap rates, giving a yield of 1.56 percent. Both companies have a BBB+ rating from Standard &amp; Poor's and an A- from Fitch.
<br /> The competitiveness effect is being felt throughout industry. Last week Fiat Chief Executive Sergio Marchionne, which is struggling against falling demand in Italy, attacked German-based rival Volkswagen for pursuing too aggressive a pricing strategy.
<br /> Borrowing inequality is affecting much of the euro zone's southern flank and has spread well beyond corporate loans. For instance, Spanish home buyers have to pay twice as much in interest for a mortgage loan than Finns.
<br /> RIVALS
<br /> Italy and Germany have traditionally been large trading partners as well as rivals in the business arena. Both countries enjoy a broad industrial base, with a strong manufacturing sector made up of thousands of SMEs.
<br /> Germany is Italy's biggest export market. Italian firms sold goods there worth a record 49.4 billion euros last year, equivalent to 13 percent of all exports. Italy's imports from Germany were 62 billion euros, around 15 percent of the total.
<br /> Companies from both countries also compete on third markets but the high cost of credit is hindering investment that Italian firms ought to be making to keep up with competition abroad.
<br /> Brass valves maker Enolgas, with sales of 30 million euros, is an example. Based near Brescia in Lombardy, Italy's wealthiest and most industrialized region, the firm pressed on with investments through the financial crisis which began in 2008.
<br /> However, owner Sandro Bonomi, said Enolgas finally had to suspend them last year.
<br /> &quot;With a crisis as acute as the current one, the focus for small Italian companies is on the short-term, on winning revolving credit to keep the operations going. This is at the expense of loans for investments,&quot; he said.
<br /> Source: Reuters
<br /><br/>------------------------------------------------------------------------------------------------------------------------------------------------------------<br/>Venezuela joins trade bloc big on politics, protectionism<br/>/////////////////////////<br/>The South American trade group Mercosur welcomes Venezuela as its newest member this week but growing protectionism in the bloc's leading economies and political posturing have reduced it to a shadow of its former self.
<br /> When regional heavyweights Argentina and Brazil teamed up with Paraguay and Uruguay to form the customs union in 1995, they hoped to boost regional trade and investment by forging a bigger market along the lines of the European Union.
<br /> Trade within Mercosur has since quadrupled to $51 billion in 2011 but with economic growth slowing and Argentina and Brazil locked in a series of trade disputes over everything from cars to olives, analysts expect it to fall this year.
<br /> &quot;Argentina is seen as hostile to foreign capital, Paraguay is fragile and unstable, Uruguay has an open economy but it's very small, and Brazil continues to draw investment. Mercosur, as a whole, does not,&quot; said Jose Botafogo Goncalves, a former Brazilian diplomat and representative to the bloc.
<br /> The decision last month to allow Venezuela's entry into Mercosur stirred further controversy within the group and fueled criticism that it has become little more than a political club for left-leaning leaders who harbor ambitions of Latin American unity.
<br /> Venezuela's socialist President Hugo Chavez shares such ideals but his country's membership, pending since 2006, had been blocked because it did not have the support of Paraguay's Congress, dominated by rightist parties.
<br /> When the same Congress ousted leftist President Fernando Lugo in a lightning-quick impeachment trial in June, the other Mercosur countries suspended Paraguay from the trade bloc and took advantage of its absence to let Venezuela in.
<br /> Mercosur will formally welcome Venezuela into the fold at a presidential summit in Brasilia on Tuesday.
<br /> GRUMBLING AND REPRISALS
<br /> When Mercosur got its start, the only products that were exempted from free trade were automobiles and sugar.
<br /> All other goods were supposed to be traded freely within the bloc or gradually stripped of duties, a goal that was largely met until Argentina expanded the use of non-automatic import licenses in 2011 and imposed a new system to pre-approve nearly all purchases abroad in February.
<br /> Last month, Brazil and Argentina got Mercosur's approval to raise import tariffs on up to 200 products of their own choosing, further diluting the objective of a common tariff, on the grounds that each nation must protect its industry as economies get hit by fallout from Europe's debt crisis.
<br /> Trying to safeguard its cherished trade surplus, Argentina has used the non-automatic licenses and new approvals system to block imports, affecting goods such as farm machinery and textiles from Brazil and shoes and food products from Uruguay.
<br /> It is a clear violation of Mercosur norms, but the response from within Mercosur has been muted grumbling and a raft of reprisals by Brazil's government, which like Argentina is under pressure to revive flagging local industry.
<br /> Brazil has sporadically restricted the entry of some Argentine goods, including fruit, olive oil and cookies.
<br /> The decision by Argentina and Brazil to virtually abandon the common external tariff - the backbone of Mercosur - allows individual members to raise tariffs as high as 35 percent, compared with current levels of about 10 percent to 12 percent.
<br /> &quot;Argentina has a protectionist model, taking tariffs to 35 percent. It doesn't allow imports and it's methodology differs greatly from the original spirit of Mercosur,&quot; said Sergio Abreu, a former government minister in Uruguay.
<br /> WREAKING HAVOC
<br /> For international companies using regional bases to supply the Mercosur market, the protectionist hurdles among member states are wreaking havoc.
<br /> &quot;In the new Mercosur, foreign investment is discouraged,&quot; Abreu said.
<br /> Canada-based McCain Foods, the world's largest producer of French fries, laid off hundreds of workers at its Buenos Aires plant last month because Brazilian trade barriers were preventing it from supplying Burger King and McDonald's branches across the border.
<br /> &quot;They had to supply the Brazilian market from Canada and Europe and rent warehouse space to store some of the production that they couldn't sell,&quot; a spokesman in Buenos Aires said.
<br /> The squabbles between Mercosur's two heavyweights have also proved a headache for the bloc's smaller members.
<br /> All three of Uruguay's car assembly plants - run by Chery Socma, Nordex SA and Effa Motors - have threatened to close and have laid off hundreds of employees since October, when import restrictions in Argentina and Brazil began taking a toll on their shipments.
<br /> McCain set up shop in Argentina in 1995 with an eye on the lucrative market in Brazil, Latin America's biggest economy with a population of about 200 million.
<br /> Access to Brazil's market once allowed Argentina to attract investment that would not have landed there otherwise, particularly in the food-processing and automotive sectors.
<br /> &quot;But the way things are now, Argentina will probably have more trouble getting investments that were aimed at tapping a bigger market,&quot; said Mauricio Claveri, a trade expert at Abeceb consulting group in Buenos Aires.
<br /> Last year, Brazil received $66.66 billion in foreign direct investment compared with Argentina's $7.24 billion. In the 1990s, when Mercosur was created, Argentina received one dollar for every four dollars that entered Brazil, U.N. data shows.
<br /> &quot;Argentina would never have been able to become a top 20 automobile manufacturer if it hadn't belonged to Mercosur,&quot; said Marcelo Elizondo, an international trade specialist at Argentine consulting firm DNI Negocios Internacionales.
<br /> For the first time since Mercosur's creation, the new protectionist measures are hitting trade flows. Trade between Brazil and Argentina slumped 12 percent in the first half of the year and shrank 32 percent in June alone.
<br /> And while Venezuela's Chavez hails his country's membership in the bloc after a six-year wait, producers in the Caribbean nation are skeptical about the potential benefits.
<br /> The target dates for reducing tariffs that were set in 2006, when Venezuela's incorporation was first agreed in principle, must be overhauled and details governing its membership will take a long time to hash out.
<br /> Trade between the Caribbean country and the bloc totaled $8.76 billion in 2011, with Mercosur tallying a roughly $5 billion trade surplus.
<br /> &quot;From the point of view of manufacturing or agriculture ... we can't compete,&quot; said Manuel Heredia, president of Venezuela's National Federation of Ranchers, or Fedenaga.
<br /> Source: Reuters<br/>------------------------------------------------------------------------------------------------------------------------------------------------------------<br/>Fiscal pact headache to weigh on Hollande holiday<br/>/////////////////////////<br/>Resurgent divisions in France's ruling Socialist Party over the sway the European Union holds over national affairs could complicate President Francois Hollande's bid to get the bloc's fiscal compact ratified in the weeks ahead.
<br /> Hollande began a two-week vacation on Friday with it still unclear whether adopting the budget responsibility pact would require a constitutional change - something the president hopes to avoid.
<br /> Lawmakers on the left are calling for a fully fledged debate on European fiscal integration that threatens to revive old demons for Hollande and accentuate a divide with Berlin just as EU leaders are battling to restore faith in the euro.
<br /> Having in the past opposed the fiscal pact - which ties governments to deficit-cutting plans and is a condition for further steps to quell the debt crisis - Hollande must now rally his party behind it, weeks after getting it sweetened with a package of growth measures.
<br /> Aides say he dreads opening a debate - or even potentially a referendum - that will revive memories of his failed campaign for a &quot;Yes&quot; vote in the 2005 national popular vote on a European constitution.
<br /> &quot;This will be a moment of truth for the French and for the left,&quot; said Socialist lawmaker Christophe Caresche, a member of the National Assembly's European Affairs committee.
<br /> &quot;Hollande learned his lesson in 2005. He wants to advance without creating irreparable fractures. He does not want to get sucked into having to lead a federalist European project.&quot;
<br /> Hollande, who is vacationing on the 13th-century Mediterranean island fort of Bregancon, still opposes enshrining a budget-balancing rule in the constitution and hopes a &quot;super-law&quot; holding governments to meet budget targets would suffice.
<br /> He will return to work in mid-August just as France's constitutional council is due to rule on whether such a &quot;super-law&quot; could hold sway over public finances, given the constitution stipulates budget autonomy for French regions.
<br /> In preparation for a negative outcome, Hollande's legal team is working on a draft constitutional clause permitting the existence of a super-law on budget targets which the president hopes could be inserted with minimal upset in parliament.
<br /> &quot;Hollande is traumatized by 2005. He wants to avoid a big debate and a crisis in his party,&quot; said a presidential source.
<br /> PRESSURE BUILDING
<br /> The Socialists have a majority in both houses of parliament, which should mean Hollande could pass a &quot;super-law&quot; as soon as September, if the constitutional council consents.
<br /> But if, instead, a constitutional clause is necessary, inserting it would require a three-fifths majority in a joint parliamentary vote. With a number of left-wing deputies saying they could vote against, Hollande risks being heavily dependent on support from centrist and conservatives lawmakers.
<br /> What Hollande most fears, as he tries to convince Berlin that he is committed to deeper economic union while reassuring left-wingers that nothing will happen too fast, is a heated discussion that could spark calls for a referendum.
<br /> &quot;We cannot avoid a debate,&quot; said Socialist lawmaker Barbara Romagnan. &quot;We have a decision to take which is: will we accept this treaty? I don't see how we can say yes if we want to meet our economic promises to voters and respect democracy.&quot;
<br /> External pressure is building on France to drop its age-old resistance to the kind of fiscal and political union Berlin is pushing for, with policymakers from across Europe pressing the issue in recent interviews in French newspapers.
<br /> Hollande has backed Italy's push for rapid intervention by the European Central Bank or the EFSF bailout fund to lower borrowing costs in Italy and Spain. Yet Germany has made such measures conditional on a euro zone road map to fiscal union, a concept many in France fear would cede too much sovereignty.
<br /> &quot;To the extent that political integration is viewed by more and more people as a necessary condition, it is going to pose a major challenge to France,&quot; said Andre Sapir, a fellow at the Bruegel think tank in Brussels. &quot;The ball is in France's court.&quot;
<br /> Source: Reuters<br/>------------------------------------------------------------------------------------------------------------------------------------------------------------<br/>Indian economy's growth uneven, says Union minister<br/>/////////////////////////<br/>Terming the India's growth as &quot;uneven&quot;, a Union minister today said, although the Indian economy has grown rapidly over the last decade, significant percentage of the population lacks adequate food and clothing. 
<br /> &quot;Although the Indian economy has grown rapidly over the last decade, the growth has been uneven with large pockets of poverty amid islands of affluence,&quot; Union Minister of state for Consumer Affairs and Food K V Thomas said yesterday. 
<br /> Considering this, we need to ensure that every Indian has the opportunity to have a decent quality of life and that the prevailing inequalities be reduced, Thomas said in his address at the 7th Convocation of the Karunya University, which was read in absentia by his brother. 
<br /> &quot;India has a significant percentage of the population in poverty-- who lack adequate food, clothing and shelter as well as access to health care and education,&quot; Thomas, who was reportedly indisposed, said. 
<br /> Thomas said Indian higher education, especially professional, needs to become international in character and only then will Indian degrees be valued worldwide. 
<br /> Accreditation processes, both national and international, were critical and need to free the institutions from the fetters of excessive regulation so that they can develop and flourish. Very few of our institutions appear in International rankings of higher education, he said. 
<br /> About 2,000 students-- graduates, post graduates and Phds-- were awarded degrees by the Chancellor, Paul Dinakaran. 
<br /> Source: PTI<br/>------------------------------------------------------------------------------------------------------------------------------------------------------------<br/>Insight: ECB thinks the unthinkable, action likely weeks away<br/>/////////////////////////<br/>The European Central Bank is thinking the unthinkable to save the euro, including resuming its controversial bond-buying program and possibly even pursuing quantitative easing - in effect printing money.
<br /> Bold action is probably at least five weeks away, insiders say, though some more clues may come when the ECB reveals its latest interest rate decision on Thursday.
<br /> Several other pieces have to fall into place before the ECB will act decisively, insiders say. These include a request for assistance from Spain, which Madrid is still resisting, a decision by euro zone leaders to let their bailout fund buy bonds at auction, and a German court ruling on the legality of the euro zone's permanent rescue fund, due on September 12.
<br /> Above all, ECB President Mario Draghi must overcome the resistance of Germany's powerful central bank, the guardian of monetary orthodoxy, glowering from the other side of Frankfurt.
<br /> Draghi raised expectations last Thursday that the ECB would resume buying sovereign bonds as Spanish and Italian borrowing costs vaulted towards levels that could force the euro zone's third and fourth largest economies out of the credit markets.
<br /> &quot;Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,&quot; he told a pre-Olympic investment conference in London.
<br /> Draghi made it clear he believes the ECB can legitimately intervene in bond markets to curb the high interest rates investors are demanding for buying Spanish and Italian debt rather than safe-haven German Bunds. &quot;To the extent that the size of the sovereign premia hamper the functioning of the monetary policy transmission channels, they come within our mandate,&quot; he said.
<br /> His remarks surprised some colleagues on the ECB's policy-setting Governing Council, who had not been consulted, central bank sources said.
<br /> The counterblast from the Bundesbank came within 24 hours.
<br /> The once mighty German monetary authority, now an affiliate and the biggest shareholder in the ECB, declared its opposition to reviving the dormant bond-buying program, arguing that it would remove market pressure on heavily indebted governments to pursue austere budget policies and economic reforms.
<br /> &quot;The mechanism of bond purchases is problematic because it sets the wrong incentives,&quot; a spokesman for Bundesbank President Jens Weidmann told Reuters.
<br /> The Bundesbank has also consistently opposed other ideas - such as giving the euro zone's rescue fund a banking license and letting it borrow from the central bank to fight fire in the bond markets - on the grounds that they breach a European Union treaty prohibiting monetary financing of governments.
<br /> Draghi and Weidmann will have a chance to thrash out their differences when they meet before Thursday's monthly meeting of the Governing Council. The outcome of this struggle between the ECB and the German parent on which it was modeled may determine whether the euro survives.
<br /> This account of the tug-of-war among Europe's central bankers is based on numerous conversations with ECB and national central bank policymakers, European Union officials and private bankers privy to ECB policy debates, who spoke on condition of anonymity because of the acute sensitivity of the subject.
<br /> OPTIONS
<br /> The ECB has already cut interest rates to a record low 0.75 percent, bought 211.5 billion euros-worth of troubled euro zone governments' bonds and loosened its collateral rules so it now accepts all kinds of paper from mortgage-backed securities to car loans as surety for funds.
<br /> Short-term options for further action include a deeper cut in rates and a further easing of collateral rules. But both are seen as having limited benefits and plenty of drawbacks.
<br /> The main idea under consideration is re-activating the bond-buying program for Spain and Italy in tandem with the euro zone's rescue funds. Supporting Spain would entail a negotiated agreement stipulating fiscal targets and economic reform conditions and international monitoring of them, several sources in the Eurosystem of central banks said.
<br /> To save Spanish Prime Minister Mariano Rajoy's face, such a program might be less exacting than the EU/IMF bailouts imposed on Greece, Ireland and Portugal.
<br /> The ECB might also make a third drop of long-term cheap loans to euro zone banks after lending them 1 trillion euros in three-year, low-rate funds earlier this year. But much of that money has so far ended up parked back in the ECB's vaults rather than being lent to other banks or to the &quot;real economy&quot;.
<br /> Some central bankers believe a depreciation of the euro's exchange rate could ease the problems of peripheral countries such as Portugal and Italy, which compete with China in sectors such as textiles, shoes and furniture.
<br /> The euro has slipped from around $1.50 to just above $1.20 since the sovereign debt crisis erupted in early 2010, but any deliberate move by the ECB to weaken the exchange rate would be likely to anger the U.S. Federal Reserve and the Bank of Japan.
<br /> BIG BAZOOKA
<br /> Bold options such as accepting losses on ECB holdings of Greek government bonds, and the ultimate &quot;Big Bazooka&quot; of buying up masses of bonds from all euro zone countries, are also on the central bankers' radar screen, the sources said.
<br /> The latter would emulate the U.S. Federal Reserve and the Bank of England policy known in central bank jargon as quantitative easing, and to ordinary citizens as printing money.
<br /> Since the onset of the global financial crisis in 2008, the Fed has tripled the size of its balance sheet and the Bank of England's has more than quadrupled; but the ECB's has expanded less than threefold, mostly through long-term lending to banks.
<br /> When the ECB did buy Greek, Portuguese, Irish, Spanish and Italian bonds, a program suspended since March, it insisted that for each extra euro created, a euro was withdrawn from circulation by taking in interest-bearing deposits from banks. This is called sterilization, intended to prevent inflation.
<br /> The most radical option for the ECB would be to create money to buy debt across the euro zone without sterilizing the purchases. Insiders say that if such an operation bought debt from all euro zone countries, the ECB could avoid accusations of financing individual governments.
<br /> A risk of deflation could give the ECB cover to embark on QE, and some policymakers think that in extremis the Bundesbank could go along with such a policy, so long as it did not involve buying government bonds.
<br /> With inflation falling fast towards the ECB's target of below but close to 2 percent, growth slowing sharply in northern Europe and recession deepening in the south, the central bank has unusual scope to move.
<br /> By buying assets other than sovereign debt, such as bank and corporate bonds, the ECB could still pump money into the system while circumventing the &quot;monetary financing&quot; taboo. One option would be for the ECB to allow the euro zone's national central banks to do the bond-buying and carry the risk.
<br /> Yet some central bankers worry about whether QE would achieve the desired result of durably reducing sovereign bond spreads and reviving inter-bank lending.
<br /> COMMUNICATIONS
<br /> The ECB used to be known for an iron grip on its communications policy. Board members and national central bankers were assigned key messages to deliver, and massaging market expectations was one of the great skills of Draghi's predecessor, Frenchman Jean-Claude Trichet.
<br /> That discipline began to fray in the 2008 financial crisis, when then Bundesbank chief Axel Weber opposed any interest rate cut below 1 percent. It weakened further in May 2010 when Weber openly dissented from the ECB's decision to start buying Greek bonds, arguing that it could be inflationary in the long term.
<br /> Weber and former ECB chief economist Juergen Stark both resigned in opposition to the bond-buying program, fuelling German public suspicion of the ECB, which was seen as having strayed from its German orthodox monetary roots.
<br /> Insiders say Draghi, who encourages debate, intentionally runs a less rigidly controlled ship than Trichet did.
<br /> However, several fellow central bankers were furious when Austria's Ewald Nowotny last week floated the idea of giving the euro zone's future permanent rescue fund a banking license, so it could tank up on cheap ECB liquidity. A legal opinion previously sought by the ECB had concluded that such a move would breach the treaty ban on monetary financing of governments, insiders said.
<br /> Nowotny's friends said he wanted to stir up debate and hinted Draghi was privately sympathetic to his view. Critics say he just muddied the waters and enraged the Bundesbank.
<br /> WHAT WORKS?
<br /> Within the Eurosystem, officials are puzzling over what will work. Merely reactivating the ECB's bond buying program, even in tandem with bond-buying by the euro zone's rescue funds, may be too small a bazooka to deter speculators from betting against Spain or Italy, two central bankers said.
<br /> &quot;Hedge funds aren't stupid. They can count. They know how much is really available from the rescue funds, how much the central bank has bought so far, and what the political constraints are on doing more,&quot; one euro zone source said.
<br /> Even when ECB bond-buying was in full flow last year, the ECB's Governing Council limited purchases to roughly 20 billion euros a week, partly at the Bundesbank's behest, insiders say.
<br /> The experience remains seared into central bankers' memory after a debacle with Italy. Within days of making commitments to deficit cuts and economic reforms to convince the ECB to step in, then Italian Prime Minister Silvio Berlusconi went back on his promises and treated them as a joke.
<br /> &quot;They felt cheated and they don't want to have that happen a second time,&quot; a senior financial source in the euro zone system said.
<br /> So barring a dramatic deterioration, ECB action may have to wait until conditions in the markets get still worse, Greece gets closer to the brink, and the euro zone, in the words of one Brussels crisis manager, &quot;explores the edge of the abyss&quot;.
<br /> Source: Reuters<br/>------------------------------------------------------------------------------------------------------------------------------------------------------------<br/>Greece eyes T-bills to cover funding squeeze: minister<br/>/////////////////////////<br/>Greece is leaning towards issuing T-bills to plug a cash squeeze this month as resumption of its bailout funding hinges on a positive assessment by European Union and IMF inspectors, its deputy finance minister told Sunday's Kathimerini newspaper.
<br /> Cash-strapped and behind targets agreed under a 130 billion euro ($160.4 billion) financial rescue package, Athens faces a 3.2 billion euro bond maturity on August 20.
<br /> &quot;The situation (with cash reserves) is borderline and will remain so until September when the (EU/IMF/ECB) report will be concluded,&quot; Deputy Finance Minister Christos Staikouras told the paper in an interview.
<br /> &quot;We are managing cash reserves carefully and exploring several solutions, such as an increase in the issuance of T-bills. We will choose the optimal solution in agreement with our partners,&quot; he said.
<br /> Shut out of bond markets, Greece issues T-bills on a monthly basis to refund maturing short-term paper. It needs to roll over 2.6 billion euros of six- and three-month T-bills this month.
<br /> German newspaper Die Welt said on Saturday the European Central Bank agreed on Thursday to raise the upper limit of T-bills the Bank of Greece can accept in exchange for emergency loans.
<br /> Staikouras said the government was finalizing an 11.6 billion euro package of spending cuts to bring the bailout program back on track, hoping a positive report by the so-called troika of inspectors will release the next aid payment.
<br /> The troika will meet with Finance Minister Yannis Stournaras on Sunday. Athens is keen to convince its international lenders it will stick to the prescribed economic adjustment plan before asking for any break such as more time to apply the austerity measures.
<br /> &quot;The more credible we are in attaining goals and commitments, the more room we will have to seek amendments to the pursued support program,&quot; Staikouras told the paper.
<br /> Greece has narrowly dodged bankruptcy several times before, with the government carrying out a juggling act, holding off from paying some suppliers until the next tranche of aid from lenders arrives.
<br /> Staikouras said the three-party coalition government is trying to avoid a euro zone exit and striving to achieve a favorable outcome.
<br /> &quot;The good scenario we expect to make happen is getting a positive report from our partners, conclude the recapitalization of banks, achieve an extension of the fiscal adjustment and see the economy recover,&quot; Staikouras said.
<br /> Source: Reuters<br/>------------------------------------------------------------------------------------------------------------------------------------------------------------<br/>ECB's bond incentive carries own risks<br/>/////////////////////////<br/>The European Central Bank has given investors a clear incentive to buy Spanish and Italian bonds that mature sooner rather than later, creating the risk that these countries will struggle to sell longer-dated debt.
<br /> Such a development would force Spain and Italy to tap the bond markets more frequently for money and make them more vulnerable than they are now to swings in investor sentiment.
<br /> The premium that investors demand to hold 10-year Spanish or Italian bonds rather than two-year paper has ballooned since ECB President Mario Draghi said on Thursday any new ECB purchases of government bonds would focus on shorter-dated maturities.
<br /> The gap between the yields on Spain's 10- and two-year bonds has leapt by nearly a full percentage point in the past 24 hours to 310 basis points. That is its widest since at least 1990, according to Datastream.
<br /> Italy is viewed as less likely to need a bailout than Spain but has seen its 2/10-year yield spread widen by a quarter to 289 basis points as its long-dated debt has also fared worse than bonds with shorter maturities.
<br /> These trends are expected to continue for at least another month and mean that Spain and Italy will find it cheaper to offer shorter-dated bonds when they next hold debt auctions.
<br /> Anything that keeps borrowing costs in check will be helpful for these countries in the short term, but analysts say current trends risk posing difficult funding choices for them.
<br /> &quot;The aim of the ECB is to reduce the financing costs for Spain and Italy but you are increasing pressure on these countries to sell more short-term paper, which will create the grief of redemption in the next couple of years,&quot; said Alessandro Giansanti, strategist at ING in Amsterdam.
<br /> &quot;Italy and Spain will have even more trouble in issuing longer-dated securities because there will be reduced investor demand for such paper. Also, investors will look very closely at the redemption profile and start to demand a risk premium.&quot;
<br /> Giansanti expects the Spanish 2/10-year yield spread to widen to 350 basis points in the next two weeks.
<br /> TROUBLING TRENDS
<br /> As the euro zone debt crisis has spread from Greece, Portugal, and Ireland to Spain, the euro zone's third biggest economy has already started to issue more shorter-dated paper than it did in recent years.
<br /> The average maturity of Spanish debt fell to 6.29 years in June from 6.59 years in January 2011, according to Spanish Treasury data. While monthly data is only available from 2011, that was the lowest since 2004 on annual comparisons.
<br /> This trend will become even more pronounced if investors are going to demand a hefty premium to buy longer-dated debt, which they know won't be targeted by any future ECB bond-buying program.
<br /> Given the next Spanish bond auction is on September 6, there is plenty of time for the incentive to issue shorter-dated paper to become even more marked.
<br /> &quot;If the cost of funding is cheaper at the shorter end of the curve, and that is the sort of maturity that investors are going to be demanding, then, in the next couple of quarters, we will see more issuance in the shorter end,&quot; said Brian Barry, fixed income analyst at Investec.
<br /> SUSTAINABILITY IS KEY
<br /> Some fixed-income experts, such as Ciaran O'Hagan, strategist at Societe Generale in Paris, say the maturity profile of outstanding Spanish and Italian debt isn't the most pressing concern.
<br /> &quot;In principle, longer duration is better but investors are more concerned about sustainability and that depends on getting attractive rates,&quot; he said.
<br /> Spanish two-year bond yields have fallen to 4.05 percent, nearly a full percentage point below Thursday's peaks and below a euro-era high of 7.18 percent set on July 25. Two-year Italian yields dropped to 3.15 percent from July peaks of 5.3 percent.
<br /> Current yields are definitely more attractive from a borrower's point of view, but could pose risks if that prompts Italy or Spain issuing more shorter-dated bonds.
<br /> &quot;The ECB has created some leeway in the short term as the levels of (Spanish and Italian bond) yields we are now seeing at the front end are more sustainable,&quot; said Elwin de Groot, economist at Rabobank in Utrecht.
<br /> &quot;But if Spain and Italy start issuing shorter-dated debt as a consequence, they may give away the present from the ECB because they will have to come to market with a higher frequency and they will become more vulnerable to refinancing risk and any hiccups in sentiment.&quot;
<br /> Source: Reuters
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